DEALBOOK; SAC Says It Will Begin Clawing Back Compensation in Insider Trading Cases

By PETER LATTMAN

Published: May 3, 2013

7:54 p.m. | Updated

Steven A. Cohen, the founder of the hedge fund SAC Capital Advisors, sat for a deposition in a lawsuit in 2011 and acknowledged that he was unfamiliar with his firm’s compliance and ethics policies on insider trading.

“I’ve read the compliance manual, but I don’t remember exactly what it says,” Mr. Cohen said, according to a transcript of the testimony.

On Thursday, Mr. Cohen sought to convince SAC investors and regulators that he takes compliance seriously. In a letter to his investors, Mr. Cohen announced a broad set of changes that would bolster the fund’s compliance practices, including clawing back the pay of employees who violate the law.

“These reforms send an unmistakable message: We have zero tolerance for wrongdoing and if you are caught breaking the rules, it will cost you,” Mr. Cohen wrote in the letter. “This problem is our problem to solve. It’s my name on the door and we will solve it.”

Mr. Cohen’s letter comes as he fights to hold on to his investors, who must soon decide whether to withdraw their money as a criminal investigation continues into improper trading at the $15 billion fund. Last week, the firm extended a May 15 deadline for withdrawals for an additional three months.

Earlier this year, investors withdrew $1.7 billion, or about 25 percent of its outside money. (The rest of SAC’s funds — about $9 billion — is mostly Mr. Cohen’s.)

SAC is adopting these measures as federal prosecutors continue to press criminal cases against two former SAC employees — Mathew Martoma and Michael S. Steinberg — and the fund awaits final approval of a record $602 million civil settlement with securities regulators related to one of those cases.

All told, at least nine current or former SAC employees have been tied to insider trading while at the fund; four have pleaded guilty.

“We have endured speculation that somehow this conduct is acceptable to the firm, its senior management and to me,” Mr. Cohen wrote. “It is not, nor has it ever been.”

The hedge fund community had mixed reactions to SAC’s announcement. Some applauded the move, noting that it was a clear effort by Mr. Cohen, who has not been accused of wrongdoing, to take ownership of what many have perceived as a lax approach to compliance.

“The S.E.C. is very focused on the tone at the top,” said Steven B. Nadel, a hedge fund lawyer at Seward & Kissel, referring to the Securities and Exchange Commission. “Steve Cohen appears to be taking on an active involvement in SAC’s compliance regime — and I would imagine that regulators will be pleased by this.”

Yet another lawyer, a former federal prosecutor, viewed the measures as “window dressing,” and “too little, too late.” He especially took issue with the announcement that the firm would claw back the compensation of wrongdoers.

“Why does SAC need to warn employees that they will hold back the pay of malefactors?” said the lawyer, who spoke on the condition of anonymity because of fear of reprisal. “Do they need an inducement to not violate the law?”

As described by Mr. Cohen, if an employee is accused of wrongdoing and leaves the fund, SAC will hold back any deferred compensation. If the employee is convicted or subject to other sanctions, that compensation will not be paid. Mr. Cohen compared the new clawback rule to those that the large banks instituted after the financial crisis under pressure from regulators.

“We want to let job applicants know that if they do not intend to play by the rules they should not come to SAC,” Mr. Cohen said.

The fund also announced plans to increase its compliance department by 25 percent this year, to about 45 employees. The firm said that it had 10 people in the department five years ago. In addition, it instituted guidelines for how SAC employees interact with public company employees and use “expert network” firms.

Expert network firms, which are middlemen connecting hedge funds to public company employees, have been at the center of many insider-trading cases, including several involving former SAC employees. SAC Capital’s new rules limit the use of any one consultant at an expert network firm to four calls a year unless the compliance department waives that limit.

Under the withdrawal extension that SAC announced last week, clients can still redeem on May 15, but they can also wait three more months to make a decision without hampering their ability to pull their investment from the fund.

“We are hopeful that the next few months will bring great clarity surrounding the resolution of pending regulatory matters,” Tom Conheeney, the president of SAC, told investors, referring to its wait for final approval of its settlement with the S.E.C.

Mr. Cohen’s letter highlighted the vastness of the firm, noting that it had more than 1,000 employees and more than 130 portfolio management teams that he oversees.

“These are good, smart, honest and hard-working people,” Mr. Cohen wrote. “I’m proud of what we’ve built and the work we do.”

He added that no matter how rigorous its compliance practices were, there were always going to be bad apples.

“Our reforms are no panacea,” Mr. Cohen wrote. “It is not possible to stop someone intent on breaking the law.”

This is a more complete version of the story than the one that appeared in print.